Directors should consider climate change risks

‘Climate-related risks’ have moved from a corporate buzzword to an actionable obligation for company directors, who should consider these risks in the context of their organisation and understand that a failure to act with regards to a climate-related risk can result in a contravention of the Corporations Act 2001 (Cth) (Act).

As the science becomes clearer, shareholders are already building a parallel expectation on directors to consider potential climate-related risks to their business. The corollary being that a failure to do so would be a failure to exercise the duty of care and diligence required by the Act, because climate change risks are presently foreseeable.

Last year, shareholder proceedings were filed against the Commonwealth Bank of Australia alleging that it failed to disclose its exposure to climate change risks in its 2016 Annual Report. Proceedings only ceased when the 2017 Annual Report was released which acknowledged the relevant climate related risks and subsequent measures being taken to mitigate them. The Australian Prudential Regulation Authority (APRA) has also recently emphasised that the financial risks associated with climate change are ‘foreseeable, material, and actionable now’.

Accordingly, companies with a business model more likely to be impacted by climate change, such as those businesses in the energy, agricultural or insurance sectors, will have to consider and address the risks climate change poses to the extent that those risks intersect with the financial interests of the entity. Director’s should also consider indirect climate-related risks could exert negative pressure on a company, such as change in government regulations, new technology adoption, shifts in market behaviour and changes to business goodwill, all stemming from climate-related risks.

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